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September 30, 2013

Mining deals have slowed to a crawl, thanks to a volatile market and pressure from investors still angry about the steep premiums paid during boom times. The pause can't last forever, but the excesses of the last cycle will cast a long shadow.

Analysis: For the next round of gold deals, small is beautiful

By Allison MartellDENVER | Fri Sep 27, 2013 3:27pm EDT

(Reuters) - Gold miners may be tempted back into the takeover game by lower prices and the need to replace reserves, but they are likely to shy away from flashy mega-projects that require big capital expenditures.Mining deals have slowed to a crawl, thanks to a volatile market and pressure from investors still angry about the steep premiums paid during boom times. The pause can't last forever, but the excesses of the last cycle will cast a long shadow."Everyone is really gun-shy of the high capex projects," said Randy Smallwood, chief executive of Silver Wheaton Corp (SLW.TO), which provides miners with cash to finance mine construction in exchange for the right to buy future silver production at a set price.Smallwood said projects that use relatively low-cost heap leaching could be more attractive than those with mills. In a heap leach, ore is crushed, stacked and irrigated with chemicals that separate out the valuable metals.Across the industry, executives have vowed to chase profits rather than production, which often means focusing on higher-grade ore. But projects that require significant capital spending may take years to break even, a risky proposition when commodity prices or tax regimes are volatile.Jason Neal, co-head of BMO Capital Markets' global metals and mining group, said market volatility has cut down buyers' tolerance for risk."They are willing to stress their balance sheet less than they would have in a more robust environment," said Neal, who advises BMO clients on takeovers and other deals.SAFE NEW WORLDThe first half of 2011 was one of the busiest periods of mergers and acquisitions in the mining industry, according to data from PwC, as miners scrambled to boost production after more than a decade of gold price increases.But investors have punished companies that bought pricey assets and then struggled with spiraling costs and falling commodity prices, and shares and dealmaking have slumped. There were 649 mining deals in the first half of 2013, down from 1,371 in the same period of 2011, according to PwC.Gold prices have fallen some 20 percent so far this year, weighing on miners' cash flow. Spot gold traded at about $1339 an ounce on Friday.Insiders say the weak market is now a buying opportunity.Centerra Gold Inc (CG.TO) Chief Executive Ian Atkinson said the mid-tier producer may be looking for acquisitions next year, once it finalizes a key mining agreement in Kyrgyzstan. Centerra did not buy during the last cycle, in part because prices looked too high, but that has changed."We've seen serious adjustments in the market value of a number of these other opportunities," said Atkinson. "Some of these things are not only fairly valued, they may be somewhat undervalued."Centerra is not looking to take on a huge, complex project. Atkinson said it would look for something to produce upwards of 100,000 ounces, perhaps 150,000 ounces a year, and at that scale, big capital requirements would be unusual.Not everyone is as cautious as Centerra. China Gold International Resources Corp Ltd (CGG.TO), the overseas listing vehicle of state-owned China National Gold, can finance substantial capital costs and is looking for acquisition targets, according to Executive Vice President Jerry Xie.But he stressed that the price has to be right and the company won't buy something it may have to write down later."We know the drill," Xie said. "We know what the true value is. We know exactly what's going on."DON'T BET THE COMPANYOne thing that sets miners apart from much of the economy is that they oversee wasting assets. While a retailer can build a loyal customer base that will return year after year, every ounce of gold removed from a mine makes that mine less valuable.That is why miners talk about the need to "replace ounces" by exploring for minerals or buying smaller companies.Targeting less capital-intensive mines means missing out on some projects with big earnings potential. Take Pascua-Lama, Barrick Gold Corp's (ABX.TO) massive project on the border of Chile and Argentina.The capital bill will be steep - up to $8.5 billion, according to the last estimate from Barrick, the world's biggest gold producer - and the project has been delayed by permitting issues.But when and if the mine opens, Pascua-Lama is expected to have exceptionally low operating expenses, producing some 800,000 to 850,000 ounces of gold a year at all-in sustaining costs of only $50 to $200 per ounce in its first five years.Barrick has said that given the tough market, it has no other plans to build new mines.Going forward, it may take cooperation from several companies to keep developing top-tier projects."It's not unusual with big projects in other industries to look at consortiums," said Gary Goldberg, the chief executive of top U.S. gold miner Newmont Mining Corp (NEM.N).Spreading risk around can make it possible to develop these projects, "without betting the company, so to speak," he said.(Additional reporting by Nicole Mordant and Julie Gordon; Editing by Janet Guttsman and Jim Marshall)

September 23, 2013

I would be looking to buy on the inevitable weakness in the share price on the back of this. It is a great chance to pick up best in class assets at the bottom of the market ahead of delivery on their deal with a potential strategic partner investor.

This comment from GMP:

23 September 2013

SUBJECT: Proposed US$100m equity deal at C$2.00/sh

IMPACT: Small negative – Friedland's strength in the past has been raising project-level funds at anti-dilutive valuations. As such, although the company stated today that talks are ongoing with strategic partners, a positive, it is a shame that ~10% dilution was required before then. On the flipside, this should strengthen the company's ability to negotiate. Of note, given the proposed C$2.00/sh price is well under recent C$2.56/sh price, we think the market will take the news negatively in the short term.

DETAILS: Ivanplats has announced that terms have been agreed on a C$100m equity raise (up to $108m) at C$2.00/sh. Robert Friedland will subscribe for $25m of the offering, effectively proportionate to his holding in the company. In addition to this, Ivanhoe indicated that talks are ongoing with strategic investors.

OUR VIEW: We have long held the view that Ivanhoe has the best undeveloped copper and PGM assets in the world, bar none, a view we maintain today. However, in our initiation we flagged that the single biggest risk to per share value was "pre-mine-funding financing for exploration / engineering studies", as announced today. Stepping back, we remain positive on the company given the asset quality and potential for anti-dilutive strategic funding going forward, but put simply, any potential deal will now be shared between an additional 50m shares causing ~10% dilution.

Looking in more detail at the funding, we do see one interesting point. Previously we expected a single fundraise ahead of Kamoa mine-build / strategic investment funding given the triple requirements of (i) taking Kamoa to Development Study stage, (ii) starting the Kamoa decline in 1Q14, and (iii) completing the Kipushi dewater, shaft refurbishment, development to access the Big Zinc, and drilling on the main ore body and Big Zinc. We don't think the current raise covers all this, so interpret the fact that it went ahead anyway as, hopefully, indicative of management confidence in concluding a strategic investment earlier than we had previously expect (from ~2H14 post Development Study). In addition, this should strengthen the company's ability to negotiate any such deal.

Looking at the requirement for the raise – we again had hoped that Kipushi would be dewatered by now as per the original schedule, which would have the double benefit of reducing burn, and opening the door to sale to avoid diluting the value of the world class Kamoa and Platreef projects, both of which declined in per share value by ~10% today. As such, although that opportunity has been missed, we do see potential for such a sale next year to fill any further funding gaps / reduce burn.

CATALYSTS:

Platreef

- 4Q13: 7.25m shaft sinking commences

- 4Q13/1Q14 (was 3Q13): Scoping study

- 2014: GMPe mining right application granted

Kamoa

- 2H13: Revised PEA

- 4Q13: Hydro power studies for Koni / Mwadingusha

- Early 2014: Kamoa decline commences

- 2H14: Kamoa Development Study completed

Disclaimer:

GMP Securities Europe LLP is authorised and regulated by the Financial Conduct Authority and is a member of the London Stock Exchange. GMP Securities Europe LLP is a subsidiary of GMP Capital Inc.

Tenth Time’s the Charm

Amid the flurry of tweetnouncements coming out of Nicolás Maduro’s trip to China was this lovely tidbit, announcing that it’s the Chinese who will get commercial gold production going at the enormous Las Cristinas mine, by some accounts, one of the largest untapped gold mines in the world. Let’s see, by my reckoning that makes them the TENTH concession holder for the mine in its rocambolesque 50 year history…

Like I wrote way back when, it’s not that we’ve been screwing this one up since the Leoni administration, we’ve just spent 49 years discovering nine different ways of exploiting Las Cristinas that won’t work.
The only question now is if PDVSA will file an arbitration claim over losing the concession, which would make them the fourth claimant suing over the same, never-yet-exploited mine.
It’s easy to make fun – too easy for me to pass up, at any rate – but early indications are that Maduro’s having some success out there. The additional $5 bn. loan from China Development Bank in particular is going to buy these guys some badly needed breathing room.
Bet they’re glad, too: failure to sign some fat deals out there would likely have seen him end up grovelling to the IMF, which is what passes for a Best Alternative to a Negotiated Agreement for him these days. (Can’t imagine that gave the Chinese any leverage to use in negotiating terms for these deals…can you?)

Gold exploration budgets directed at finding and defining new discoveries — grassroots plus 75% of late-stage — have increased significantly since 1999 and reached an all-time high of more than US$6 billion in 2012, according to "Strategies for Gold Reserves Replacement 2013 — Update," a study recently completed by SNL Metals Economics Group.

As it takes at least three years to define a major discovery (a minimum of 2 million ounces of contained gold), it is too early to judge the success of recent exploration efforts; however, data for 1990-2012 show that the total gold found in major discoveries fell short of replacing global gold production, particularly over the past 15 years.

From 1990-1997, companies' annual discovery-oriented gold exploration budget total more than doubled from US$930 million to almost US$2.2 billion, and the average cost per discovery of the 103 discoveries made during that period was US$94.4 million. From 1998-2002, exploration budgets slumped along with gold prices, and the average cost among the 31 discoveries in the period was US$132.7 million. Driven largely by rising gold prices, exploration budgets increased an average of 31% annually from 2003-2012, with the exception of a dip in 2009. Excluding the past three years to account for underexplored new deposits, the average cost per discovery among the 69 made from 2003-2009 increased to US$202.5 million.

September 6, 2013

The deals that do get done over the next several months will help shape the future of the mining industry and determine its key players

the number of deals across the global mining sector fell by 31% in the first half of 2013 compared to the same time last year, which was already considered to be a slow time for deal activity.Deal value fell 74% to US$20.6 billion between January and June 2013 versus the same period last year, which was a period highlighted by Glencore International plc’s US$54-billion purchase of Xstrata plc (GlenX), the largest-ever takeover in the sector. Even without the blockbuster GlenX agreement, deal values were down 21% for the first half of 2013 as compared with a year earlier. Gold and copper continued to be the most active for buyers and sellers in the first half of 2013. That trend is expected to continue as depressed prices create opportunities for companies that can afford to buy, and may force others to sell.

"an investor who bought OGX shares at its I.P.O. price would now have lost over 96% of the original investment." The "company is producing hardly any petroleum, and it must make bond payments of about $40 million in October and $100 million in December."

Brazilian Regulators Open a New Inquiry Into Batista - NYTimes.com

Ricardo Moraes/ReutersEike Batista, left, with President Dilma Rousseff of Brazil, was flying high in 2012. Now his energy empire is being dismantled.

SÃO PAULO, Brazil – Brazil’s securities and exchange commission said on Thursday that it had opened a new formal investigation into the business dealings of the onetime billionaire Eike Batista.

The commission, known as the CVM, is examining whether Mr. Batista and five other executives of the petroleum company OGX may have violated several articles of Brazil’s corporate legislation.

Brazil’s rules require management to release material information that could influence a company’s share price as well as disclose information about their personal ownership stakes in the company.

In March, regulators had opened a separate inquiry into whether Mr. Batista might have violated disclosure rules.

The CVM has not revealed what specific events led to either inquiry, but OGX frequently announced major petroleum discoveries that subsequently proved to be economically unviable.

The new inquiry is the first indication that Mr. Batista or other top managers of his companies may possibly have changed their ownership stakes in an illegal manner, as the assumption has been that Mr. Batista has been hurt along with his investors.

Shares in OGX fell more than 7 percent on Thursday morning in São Paulo, trading around 38 centavos apiece, or about 16 cents.

The latest problem just adds to the woes of Mr. Batista, who was once Brazil’s richest man and had vowed to become the world’s richest as well.

When OGX went public in June 2008, it sold shares to investors at 1,131 reais apiece, or about $690 at the exchange rate at the time.

The company had a 100-1 share split in December 2009. But an investor who bought OGX shares at its I.P.O. price would now have lost over 96 percent of the original investment.

In recent months, Mr. Batista’s other companies have seen similar collapses in their share prices, as cash flow proved insufficient to service debt and to make the extensive investments that were supposed to create an empire of energy, mining and logistics companies.

Mr. Batista’s fortune, once over $30 billion, has collapsed with it, and he has sold off several assets in recent months.

The company is producing hardly any petroleum, and it must make bond payments of about $40 million in October and $100 million in December.

The world’s largest bond investment firm, Pimco, invested heavily in OGX’s bonds and is leading a creditor committee that is negotiating with OGX.

Mr. Batista ostentatious lifestyle had once been popular gossip fodder. He raced speedboats, married a famous model and had dinner with Madonna. But since his fortunes have fallen, he has been forced to sell or pull back on his holdings.

Among the other assets he is seeking to sell is a luxury hotel in Rio de Janeiro, the Hotel Glória.

An attempt to sell his $19 million yacht, the Pink Fleet, failed, and Mr. Batista sent the yacht to the junkyard last month to be scrapped, presumably to save on maintenance costs.

September 4, 2013

CONCLUSION: this would be positive for SMF, ANV and SSRI. Note that Allied Nevada is a deletion candidate from the larger GDX index so the effect would be mitigated. The real positive impact would be IF Semafo is included. It would generate over 20 million shares of net purchases.

Timing is sept 13th for the announcement and sept 20th to become effective.

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Quantitative Execution Services

Tuesday, September 3th

GDXJ Gold ETF - Addition/Deletion Forecasts

Expecting several changes this quarter including SMF CN and CGG CN

The Market Vectors Junior Gold Miners Index will be having its quarterly rebalance on Friday, Sept 20th. The official announcement is expected after the close of trading on Friday, Sept 13th.

Forecasts: Expecting several changes this quarter

Allied Nevada and Semafo

Many of the forecasted additions were previously too large to be added to the GDXJ. Several are now within the 90%-98% market cap addition range. Currently we see Allied Nevada well within the addition threshold and Semafo just inside the addition threshold. This scenario could be impactful to Semafo since its potential addition would cause 7 days of volume.

China Gold

On the deletion side we are once again seeing China Gold (CGG) close to being too large for the GDXJ ETF (right at <80% threshold). If it is removed this would cause around 20M shares of supply from GDXJ. This would be ideal for the Van Eck ETF's since CGG CN is likely to be added to the GDX ETF which would result ~15 M shares of demand. Considering the low liquidity of CGG this could be very impactful.

Other deletions

There are also four likely deletions due to the minimum market cap requirement (U$ 75M).

See below and attached for our forecasts

Announcement Date: Friday, Sep 13th

Rebalance Date: Friday, Sep 20th

About the GDXJ ETF

Van Eck's Junior Gold ETF (GDXJ US) tracks the Market Vector Junior Gold Miners index and has an AUM of approximately U$ 1.6B. Changes in this index are impactful since the GDXJ holds a significant portion of the underlying names (~7% of float shares).